Eurointelligence Daily Briefing, 30 de Maio de 2012. Enviado por Domenico Mario Nuti.

 

What a mess! Spain has taken over from Greece as the main fulcrum of this crisis, with the resignation of the Spanish central bank governor and the news that the ECB refused a request by the Spanish government that would have effectively passed the burden on refinancing the banks to the central bank. Spanish and Italian spreads increased yesterday, and the euro sank below $1.25.

 

 

The big news from Spain is the early departure of Miguel Ángel Fernández Ordóñez as central bank governor, who yesterday quit in in protest against an attempt by the government to blame him for the Bankia crisis. The extraordinary aspect about his resignation is that his terms is about to expire anyway, and he is leaving a month early.

 

 

The story began when MAFO, as Ordonez is commonly known, wrote to the chairwoman of the economic committee of the Spanish Parliament “offering” to appear to dispel the rumours about Bankia, as reported by El Pais last week. The government subsequently used its majority to block a Parliamentary committee inquiry into Bankia, whilst diverting MAFO to the subcommittee of the Frob bailout fund, which meets in private, as reported in this story. The Popular Party’s parliamentary spokesman, Alfonso Alonso, argued that the appearance of MAFO before an open session of Congress could fan “political confrontation” and be “counter-productive.”

 

 

None of this is reflected in the official press release by the Bank of Spain. In his original letter to the parliament’s economic committee, MAFO said that his appearance would be essential to guarantee transparency about the financial difficulties in the banking sector. By banning the governor, the government was clearly trying to control the information flow – an exercise that thoroughly backfired.

 

ECB rejects Spanish proposal for the refinancing of Bankia

 

 

There is more bad news. The FT reports this morning that the ECB rejected a proposal under which the government would fund its stake in Bankia’s holding company BFA through a €19bn in sovereign debt, which Bankia could then swap for cash in a three-month refinance operation. According to that story, the ECB told Madrid that this would constitute monetary financing. The FT story said that it was the Spanish government strategies to push borrowing to the limit to give the ECB no choice but to step in. That strategy, too, seems to backfiring. It quoted a Spanish government adviser as saying that it was a “game of poker”, and the Spanish government was not bluffing.

 

 

(We know that Rajoy thinks the ECB is going to sort out the Spanish mess, but we think he is miscalculating here – as he has done on other occasions before. He does not want a European rescue programme for political reasons, and does not have the money to do it himself, hence the ECB solution as the only alternative. It looks like the Spanish are trying to play the “hands up or I kill myself” game, which is based on the idea that they are too big to fail. We do not think he is going to win this game.)

 

German press outraged a Spanish plan to recapitalize Bankia via the ECB

 

 

The German press is running several editorials that express horror at the idea floated by the Spanish government over the weekend that the Bankia problem may be solved by providing the troubled bank with Spanish government bonds which Bankia could in turn hand over to the ECB as collateral for central bank liquidity. Stefan Ruhkamp of Frankfurter Allgemeine Zeitung argues that by using such “tricks” Madrid is provoking the market defiance that it tries to avoid at all cost. “If the last confidence of the investors is lost all that would be left would be help request for an international stabilization program that Greece, Ireland and Portugal are already receiving”, he argues. “This is the honest and apparently unavoidable way.” Markus Zydra of Süddeutsche Zeitung points at the uselessness of ECB interventions that the Spanish government appears to hope for, particularly a reactivation of the SMP. “What would be the point,” he asks. “If the ECB once again buys Spanish bonds, the interest rates will decrease. But then what? As soon as the ECB ends its purchases interest rates will go up again.”

 

Commission proposes that Spain gets another year to cut deficit

 

 

Of course, Spain needs another year to get to 3%. Spain probably needs five years. The Commission is now bowing to the inevitable, and is proposing to extend the target for Spain to meet the 3% deficit target by one year, El Pais reports from Brussels. But there is one important caveat: Spain must undertake a number of reforms, including measures on pensions, the financial system, taxation and labour reform. Specifically, Brussels wants Madrid to accelerate the increase in the pension age. It wants a higher base for VAT, meaning that the full rate of 18% is applied to products that currently enjoyed the reduced rate.

 

Ayrault drops the 3.0% target for 2013 and is cool on Schäuble’s eurogroup bid

 

 

In interview with the French weekly L’Express Jean-Marc Ayrault hints that France that may miss the 3.0% target in 2013 but wants to stick to the aim of having a balanced budget in 2017. “The objective of a balanced budget in 2017 needs to be put in place as of 2013”, the new socialist prime minister said in response to the question whether France would stick to its 3.0% target in 2013. “But we need to tell the French the truth. For that I am waiting for the report of the court of auditors. Any decision needs take into account all the priorities of the president, the aim of balancing the budget, the contribution to growth, the need to do things in a just manner. The rhythm will be more or less quick, but these principles need to be respected. There will be no political U-turn. Nothing that Francois Hollande has proposed during his campaign was improvised.”

 

Asked if it was unimaginable to put Wolfgang Schäuble at the helm of the eurogroup Ayrault said: “We are not at this point yet. The priority is growth so that the people once again look into the future with confidence. The Germans have done a lot for their reunification, they are very eager that each country is capable of controlling its own public finances. But the problem today is growth and the gap that is appearing the North of Europe and the South. The people are tired of this climate of austerity without perspectives which creates arguments for the populists.”

 

French Left is heading for a slim majority at the parliamentary elections

 

 

According to a poll done by Ipsos for Le Monde, the French left is heading for a slim majority but no landslide at the parliamentary elections on June 10 and 17. Taken in blocs the right (50%, of which 35% comes from the traditional right and 15% from the Front National) will even surpass the left (46.5% of which 31% come from the socialists, 8% from Jean-Luc Mélenchon’s Left Front, the Greens 6%, other extreme left parties 1.5%). But as there are no electoral agreements between the UMP and the Front National, the Left will in all likelihood dominate the National Assembly, the paper points out.

 

German inflation drops below 2.0%

 

 

Annual inflation in Germany slowed to 1.9% in May, dropping below 2.0% for the first time since December 2010, preliminary data showed on Tuesday according to Financial Times Deutschland. German inflation slowed to 1.9% year-on-year in May from 2.1% in April, according to the data released by the Federal Statistics Office. The Bundesbank had recently warned that inflation in Germany may in the medium term rise above the eurozone average but most likely stay below 3.0%.

 

National Bank of Greece warns of a catastrophe if Greece were to leave the eurozone

 

 

Reuters has the report that the National Bank of Greece warned that a “Grexit” would mean a cut in real incomes by half, and a rise in both inflation and unemployment. The warning comes in a report published by the bank, according to which per capita income would collapse by 55%, the new currency would depreciate by 65%, and the peak to trough fall in outcome would increase to 22%. Unemployment would rise to 34%, from 22% now, and inflation would be 30%.

 

Another poll shows New Democracy ahead

 

 

There is more polling evidence that New Democracy has re-taken the lead ahead of the Greek elections on June 15. Reuters reports from a poll by GPO for Mega TV, according to which ND has 23.4%, and Syriza 22.1%, with Pasok at 13.5%.

 

 

Kathimerini has interesting polling evidence that tries to explain the surge for Syriza. The first is its attraction of young voters. Exit polls showed Syriza was the dominant party among Greeks under 50. The second is that Syriza appeal to people with jobs but especially with the unemployed. Syriza also has a special urban appeal with strong results in Athens, Patra and Thessaloniki.

 

Philip Lane on the Irish discussion about the fiscal treaty

 

 

In the Irish economy blog, Philip Lane explains what the Irish are discussion when they are talking about the fiscal treaty, ahead of tomorrow’s referendum. He concludes

“…that there is a substantial risk that Ireland’s bluff would be called and Ireland enters an antagonistic relationship with our European partners. Such an isolationist strategy is especially risky for a high-income country with an economic structure that is deeply embedded into global financial and trade networks. A badly-played hand could map in significant output and financial losses over time that would be far greater than any reduction in the debt servicing burden obtained through a disorderly default.”

 

Martin Wolf on Germany’s perceived self-interest

 

 

Martin Wolf writes in his FT column that the solution to the eurozone crisis will ultimately depend on Germany’s self-interest. At the moment, Germany’s announced policies are not consistent with a survival of the eurozone.

“This is how I understand the views of the German government and monetary authorities: no eurozone bonds; no increase in funds available to the European Stability Mechanism (currently €500bn); no common backing for the banking system; no deviation from fiscal austerity, including in Germany itself; no monetary financing of governments; no relaxation of eurozone monetary policy;and no powerful credit boom in Germany. The creditor country, in whose hands power in a crisis lies, is saying “nein” at least seven times.”

 

 

10-Y Spreads, Forex, ZC Swaps and Euribor-Ois

 

 

Getting worse for Spain and Italy. Euro now under $1.25.

10-year spreads
	Previous day	Yesterday	This Morning
France	1.174	1.155	1.165
Italy	4.510	4.663	4.647
Spain	5.133	5.118	5.148
Portugal	11.018	10.806	10.815
Greece	28.175	28.383	#VALUE!
Ireland	6.095	6.055	6.093
Belgium	1.855	1.855	1.882
Bund Yield	1.364	1.36	1.376
Euro Bilateral Exchange Rate
	Previous	This morning
Dollar	1.253	1.2466
Yen	99.690	99.04
Pound	0.799	0.7982
Swiss Franc	1.202	1.201
ZC Inflation Swaps
	previous	last close
1 yr	1.58	1.7
2 yr	1.54	1.54
5 yr	1.59	1.57
10 yr	1.87	1.86
Euribor-OIS Spread
	previous	last close
1 Week	-6.414	-7.214
1 Month	1.121	-0.579
3 Months	31.293	31.293
1 Year	95.500	97.6
Source: Reuters